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Avoiding the Cost Ratio Trap

Resource Center - Foundation

(Nov. 24, 2009) Is your organization feeling pressured to meet unrealistic expectations for fundraising costs? Learn how you can move beyond simplistic ratios and measure the real returns on your investment in fundraising.

One of the most common questions faced by charitable organizations is: What percentage of my donation will go to the cause? This has unfortunately become the measure of a "good" charity in many donors' minds. Yet, this measure does not take into account the quality of services, the kind of fundraising being done, the longer term outcomes of the programs, or even whether gifts are being used as intended, notes an article on cost ratios published in KCI's Philanthropic Trends Quarterly newsletter.

To counter the notion that a fundraising cost ratio can be effective in comparing charities of all sizes, missions and types, nonprofits need to be open and unapologetic about reasonable fundraising costs, moving themselves and the public from a mentality of cost minimization to cost optimization.

"It is tempting to want to keep your non-programmatic costs as low as they can possibly be, but the question of cost ratios is actually much more complex than that," explains Karen Willson, CFRE, senior vice president at KCI (Ketchum Canada Inc.) "There are many factors at play, including whether your charity is new or growing and the kinds of services your charity performs. Some organizations simply need to spend more on fundraising than others. And for all charities there are times when spending more is important for long-term success."

False Perceptions

There are many misperceptions regarding cost ratios, held by the media, boards and even fundraisers themselves, says Willson.

First, there is the public perception that an important measure of success or worthiness of an organization is based on how little it can possibly spend on fundraising for every dollar raised. While this makes for a more "efficient" use of charitable donations, it is not the same as having an "effective" program, either for fundraising or the end services performed.

Yet, in reality, donors themselves are not interested in ratios--rather they want to see results, she says. And therein lies the trap that many fundraisers and nonprofits fall into: They are busy trying to spend as little as possible and to show a good ratio of dollars spent versus dollars raised, while the donors want a nonprofit to make more things happen in the end.

By worrying less about the percentages spent, and focusing more on the return on investment, and more dollars raised, donors will be far more pleased. "Once we stop thinking cost per dollar raised is the most important measure--others will follow," Willson says.

One Size Doesn't Fit All

"As a consultant, I often get cries for help from nonprofits asking me to help them lower their CPD (cost per dollar raised), and I, too, fall into the trap of thinking this is of some great value to the organization," explains Willson. "In reality, you do want to consider your non-program expenditures, but you must put it into context. Are you investing in technology this year? Are you going to raise more by spending more on fundraising? Then you should not shy away. Consider this ratio on a rolling 3-5 year span, rather than year by year. If you are just starting a new organization, a larger CPD is expected."

Some organizations simply require more infrastructure and fundraising investment than others to achieve their mission, Willson adds. "Raising money for a symphony is harder than raising money for sick children," she explains, noting that some causes require more time and energy in making a convincing case for support than others. Arts organizations, for example, naturally have a smaller donor base than do organizations that address more urgent needs such as hunger, poverty and illness, she says. While it is tempting to look at another organization's ratio of dollars spent and say "we can do that, too," it just may not be possible (or prudent) to achieve that level.

The proof is in the pudding, so to speak. While some organizations may be able to say that every penny of every dollar donated goes directly to help the cause, other organizations simply do not have the funding streams to make that possible, says Willson. Fundraisers should do thorough benchmarking year to year to show the growth and value of the fundraising program. Show that your nonprofit can raise even more with a larger initial investment.

In the end, donors are looking for impact--so don't get tripped up on one measure. A perfectly efficient charity may also be perfectly ineffective.

Karen D. Willson, CFRE, is senior vice president of KCI (Ketchum Canada Inc.) For more analysis on the use of cost ratios in the nonprofit sector, see Issue 3 (2009) of Philanthropic Trends Quarterly.

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